The Ratings Game: Dropbox stock surges toward best day on record as bulls say profit focus is a turning point

Dropbox shares are surging toward their best single-day performance on record on Friday as bulls say the stock has finally hit a turning point.

The cloud-storage company initially got a warm reception from Wall Street when it came public in early 2018, but the stock has languished in recent months amid questions about subscriber momentum.

Now the stock is on track to close above its initial-public-offering price of $21 for the first time since September after the company delivered quarterly earnings and forward-looking commentary that Deutsche Bank’s Karl Keirstead called “potentially thesis-changing.”

Shares

DBX, +19.90%

 are up about 18% in Friday morning trading.

Among the highlights for analysts was Dropbox’s decision to raise its operating-margin and free-cash outlook for 2020 and over the long term.

“Bottom line, the narrative that Dropbox had material operating leverage potential was a key part of the bull case at the time of the IPO but simply hasn’t played out since then, as 2019 turned into an investment year,” wrote Keirstead, who has a buy rating and $30 target price on Dropbox shares. “Investors are likely to welcome this change in tone, especially with Dropbox arguing that it is not coming at the expense of top-line growth.”

Jefferies analyst Brent Thill also said that the biggest surprise for him was Dropbox’s new operating margin forecast, with the company now targeting 28% to 30% compared with a prior range of 20% to 22%, but he’s less confident that the company won’t be sacrificing top-line potential to get there.

“[W]e remain cognizant of the balance between growth and profitability,” Thill wrote. “The lack of growth catalysts keep us at Hold.” He has a $21 price target on the stock, up from $19 before the report.

Canaccord Genuity’s Richard Davis, an exasperated bull on Dropbox’s stock, hoped that this latest report will make bears “relent.”

“I can’t recall a time in over 20 years during which investors so disdained good execution for so long,” wrote Davis, who said that the company’s results were solid on “just about every metric” he looks at. “It is difficult to break momentum in software stocks in either direction, but perhaps today’s news is the first sign of a sustainable rally.”

Davis added that while Dropbox “is certainly not perfect,” its stock looks cheap “on any metric that we can come up with.” He rates the stock a buy with a $30 target price.

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Still, the report wasn’t enough to sway Bernstein’s Zane Chrane, a bear on the stock.

“While [average revenue per user] is growing from price hikes and a shift to higher value products, our concern is that these may be less sustainable drivers of revenue growth than if sub[scriber] adds were consistent,” he wrote.

As for the company’s new long-term margin targets, he wrote that the move comes less than five months after Dropbox last gave a forecast on the metrics at its analyst day.

“The timing & magnitude of the change (and the [share repurchase authorization]), leads us to wonder if the company was under pressure from potential activists,” Chrane wrote. He has an underperform rating on the stock but bumped his price target up by a buck, to $19.

Even with Friday’s rally, shares are off 13% over the past 12 months as the S&P 500

SPX, -1.25%

 has risen 20%.

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